International Monetary Fund (IMF) Sees Indonesia's GDP Growth at 4.9%

The International Monetary Fund (IMF) expects Indonesia's economy to expand 4.9 percent year-on-year (y/y) in 2016, slightly up from a 4.8 percentage point (y/y) growth of gross domestic product (GDP) in 2015. On Tuesday (15/03) Luis Breuer, IMF Mission Chief for Indonesia, said the Washington-based lender projects limited growth (+0.1 percent) of Indonesia's private consumption this year. Regarding growth of investment and government spending in 2016, the IMF holds a more positive view. On the same day, the World Bank cut its forecast for Indonesia's 2016 GDP growth by 0.2 percent to 5.1 percent.

Breuer complimented Indonesian authorities for their good economic management and timely reforms (referring to the major fuel subsidy reforms that were conducted in 2015) amid the complex external economic environment. Prudent fiscal management made Indonesia, Southeast Asia's largest economy, well positioned to cope with ongoing global challenges (China's economic slowdown, low commodity prices and US monetary tightening). This prudent management includes the flexible rupiah exchange rate (although last year the central bank of Indonesia did use some of its foreign exchange reserves to defend the currency). Breuer added that sustained economic growth will require the continuation of such reforms and further government commitment on infrastructure development spending as well as the continuation of efforts to enhance Indonesia's investment and business climate.

In 2015 Indonesia remained placed among the strongest-growing emerging markets with a GDP growth of 4.8 percent (y/y), while inflation eased within the target range of Bank Indonesia (3-5 percent y/y), and the current account deficit narrowed. However, the 4.8 percent (y/y) GDP growth pace last year was the slowest growth pace for the Indonesian economy in the past six years. Breuer said China's economic slowdown (due to economic re-balancing), low commodity prices, and monetary tightening in the USA impact on Indonesia through three main channels: commodity prices, trade and capital flows. This year, the nation's economic slowdown is projected to end according the IMF, supported by increased investment, particularly public spending on transport and energy.

Regarding the medium-term, the IMF holds a positive view about Indonesia's economic performance due to the following favorable conditions: the young (productive) population, low public debt, large domestic markets, stable politics, and the abundant presence of natural resources. Besides these favorable conditions, economic growth can accelerate provided that the government can create more fiscal space for public investment in infrastructure development and implement well-targeted social programs. Another crucial point is reducing the country's dependence on (raw) commodities and instead improving the role of manufacturing.

IMF's Macroeconomic Forecast for Indonesia:

2015

2016F

Real GDP

4.8%

4.9%

Domestic Demand

4.0%

5.1%

Private Consumption

4.8%

4.9%

Government Consumption

4.0%

5.0%

Gross Fixed Investment

4.4%

5.7%

Source: International Monetary Fund (IMF)

The IMF stated that the economic stimulus packages that have been released by the Indonesian government since September 2015 are rightly aimed at improving Indonesia's competitiveness and the productivity of investment. However, Indonesia is also known for weak implementation of its plans and therefore the IMF advises the government to build on these actions and push on with further reforms. One point in particular that needs attention is the liberalization of trade.

Infrastructure development remains vital in order to improve the country's competitiveness. In Indonesia logistics costs account for 24 percent of GDP, considerable higher compared to 13 percent of GDP in Malaysia. To overcome the lack of adequate infrastructure Indonesia needs to attract more investment by improving the ease of doing business in the country. For example by reforming the complex regulations. The IMF notes that there are positive signs: President Joko Widodo has proven his commitment by implementing the revamped Land Acquisition Law and launching the one-stop service office at the BKPM.